Sports Betting & Investing
Humans love to gamble. Watch the NFL playoffs this weekend, and you will see betting odds related to every game, player, and play. You will be offered free bets if you set up a new gambling account. You will have access to infinite stats to help with your decision-making, and you will be inspired to turn small bets into large fortunes.
In your 401k, doubling your money can take 7 – 10 years. In a FanDuel account, it can take 3 hours if you bet on the outcome of a game or 30 seconds if you bet on the outcome of a play.
And why stop at doubling your money? Online gambling tools make it easy to combine a few sure-fire bets into a parlay, allowing you to make 100 or even 1000 times your money in the same amount of time!
It sounds amazing . . . but there is a catch. Casinos, like Wall Street, make more money by incentivizing users to take more risks.
In the context of sports gambling, casinos don’t make much money off a standard bet on a single outcome. Bet on a team to win, for example, and the casino expects to make around 5%. However, if you bet on a parlay where multiple teams must win, the casino expects to make around 20%.
Something similar happens at brokerage firms. Take this visual of Robinhood’s revenue breakdown. Users buying and selling plain vanilla stocks only account for 4% of the firm’s revenue, whereas 60% comes from users trading options and crypto.
This is an older but prettier chart created by Chartr in 2021 that makes the same point.
Amazingly, in the last quarter of the above chart, 62% of Robinhood’s cryptocurrency trading revenue was generated by users speculating in Dogecoin.
Why Does This Matter?
Charlie Munger used to say, “Show me the incentive, and I'll show you the outcome.” When Wall Street and casinos are both incentivized to push users towards riskier bets, that is exactly what is going to happen.
For sports gamblers that means you should expect to see more ways to place long-shot bets with bigger odds and higher potential payouts. For investors, that means you should expect to see more derivatives, more leverage, more exotic structures, more crypto tokens, more alternatives, and more trading opportunities.
None of this will make investors better off. But it will keep things exciting, and for some people, that is all that matters.
Sports gambling can be fun, but it does have some real consequences for investors.
Net brokerage investments by people located in states where sports betting is legal are 14% lower compared with other states, relative to pre-legalization figures. And every dollar spent on sports betting reduces net investment by $2.13. (Source: Morningstar)